All the schemes and maneuverings by eurocrat clowns and misguided economists hoping to get 4-1 or even 8-1 leverage on the EFSF bailout fund while keeping the fund’s AAA rating intact have officially died on the vine. Even the EFSF committee admits as such.

The Financial Times reports Euro rescue fund’s impact in doubt

European leaders hailed a scheme to offer insurance on losses for investors buying troubled eurozone bonds as a means of leveraging the €250bn spare capacity of the rescue fund four or five fold, to more than €1,000bn.

But the dramatic spike in borrowing costs for Italy since the summit is likely to force the European Financial Stability Facility to sweeten the deal offered to investors, which will limit the number of bonds the insurance would cover.

Klaus Regling, head of the EFSF, earlier this month said that overcoming investor concerns with improved guarantees would mean the fund was likely to have only three to four times the firepower – an admission that underlined the challenge European leaders face in steadying sovereign debt markets.

But three senior eurozone officials said even this lower target may be difficult to reach, and expect the eventual firepower to be between two and three times the remaining buying capacity of the fund. “It is falling well short of its billing,” said one. Concerns over leverage will be a key item on the agenda of eurozone finance ministers meeting on Tuesday.

Please recall the huge number of economic illiterates who protested that 4-1 leverage was “not enough”. Also note, the market has emphatically stated that any leverage may be too much.

Ironically, the “grand plan” for the EFSF hatched by German Chancellor Angela Merkel and French President Nicolas Sarkozy last month may die before terms are even set for its use.

Mike “Mish” Shedlock
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